Credit card complexity conceals costs

December 31, 2007|By Adam J. Levitin

Pop quiz: What's the interest rate on the credit cards you're carrying? How about the default rate? Do you know what constitutes an event of default? What will trigger a penalty fee or surcharge? How much are those fees? If you're like most Americans, you probably cannot answer many or any of these questions.

Consider this: It's entirely possible that under a common cardholder agreement provision called a universal cross-default clause, your dispute with the cable company over lousy service constitutes an event of default on your credit card. The default bumps your interest rate up to 32 percent, which is applied retroactively to your existing balance and (under another common practice called "two-cycle billing") to the balance you paid off last month.

Credit cards have a complicated price structure. Cards have multiple price points - annual fees, merchant fees, interest (at several different rates) and assorted back-end fees, such as late fees, over-limit fees and currency conversion fees. This pricing structure makes it virtually impossible to determine the potential costs of carrying a balance.

This complex, convoluted pricing structure also invites abusive fees and billing practices, such as late fees that do not correlate with either the balance or time a payment is late, universal cross-default and two-cycle billing. If you are among the nearly two-thirds of Americans who do not consistently pay off your credit card bills in full and on time, you've probably been hit with some combination of these fees.

It's no wonder that American credit card debt is approaching $1 trillion.

And there are other consequences: Dollar for dollar, as Ronald Mann of Columbia University Law School has shown, people with credit card debt are more likely to file for bankruptcy than people with any other types of debt. Society as a whole ends up holding the bag for the widespread costs of skyrocketing credit card debt.

The Byzantine nature of credit card pricing structures makes it nearly impossible for people to use credit cards intelligently and responsibly. No amount of increased truth-in-lending disclosure or consumer financial literacy education will change this.

I qualify as a savvy and dedicated reader of financial contracts, but frequently I cannot calculate with certainty the costs of carrying a credit card balance, and my calls to card issuers' 800-number customer service lines have done nothing to clarify matters.

The lack of straightforward, easily comparable and understandable pricing is a major factor in the growth of credit card debt.

Several bills pending before Congress aim to help by banning abusive credit card pricing and billing practices. Some of this legislation would encourage a simplified, straightforward pricing structure for credit cards that allows consumers to easily compare cards apples-to-apples and to accurately weigh the potential costs of using a card for a purchase.

No one is telling the credit card industry how much credit should cost. That decision is for the invisible hand of the market. But the only way that invisible hand can work its magic is if consumers can actually tell what credit cards cost.

Adam J. Levitin is an associate professor at Georgetown University Law Center. This article originally appeared in the Chicago Tribune.